Fed’s Williams sees U.S. inflation, hiring underestimated

RachelKoning Beals

San Francisco Fed President John Williams, largely considered a hawk, does not hold an interest rate policy vote in 2016.

U.S. inflation is likely running hotter and the job market is stronger than current data suggests, San Francisco Federal Reserve President John Williams said Tuesday.

Further, U.S. concerns that domestic interest-rate policy is running counter to conditions in the rest of the world are misplaced, Williams emphasized in a speech delivered in Singapore.

“We’ve dipped just below [5%], to 4.9%, and I expect the unemployment rate to continue to edge down, reaching the mid-4s by late this year,” Williams said.

He addressed concerns leveled from other economic corners that suggest many workers are underemployed and that the labor-force participation rate remains softer than expected.

He added: “While part-time employment for economic reasons looks like it’s still somewhat elevated relative to historical norms, the labor-force participation rate now appears to be consistent with its longer-term trend—or what we might more simply call ‘normal.’”

Williams noted increased confidence is leading more people to quit their jobs. Job vacancies are hovering around the highest levels since data collection began in 2000.

In a media interview last week, Williams said March was a “little early” for another rate hike after the Fed uncorked higher rates for the first time in nearly a decade in December. Williams participates in Fed policy discussions but does not hold a vote on the Fed’s rate-setting policy panel this year. He is one of several Fed members to hit the speaking circuit in recent days, including Chairwoman Janet Yellen, who takes the microphone in New York later Tuesday.

He also tackled inflation in Tuesday’s speech, arguing about the risks of trying to control inflation that is too high.

“Many people think that Fed policymakers’ concern lies disproportionately with inflation that is too high. They think we view inflation lower than 2% as sort of “not great,” but see inflation above 2% as catastrophic,” he said. “That’s not the case. In my view, inflation somewhat above 2% is just as bad as the same amount below.”

“All in all, the recent data reinforce my expectation that inflation is on track to move back to 2% over the next two years,” he said, noting that housing costs and other service-economy inflation point to higher inflation than low energy and imported goods costs would lead many to believe. Further, a strong dollar and low oil prices could continue to correct, he said.

Williams also cautioned against a deep read into the impact of market swings—in the U.S. and abroad—on Fed decision-making.

“We live in a global economy and what happens in China or Europe or Brazil isn’t contained by national borders … but others’ economic fates do not spell our own,” he said. “The U.S. is affected by what happens around the world, but it is also powered by domestic demand and we make our own monetary policy … Part of the reason the global economic forecast hasn’t changed that dramatically is that countries and central banks have taken policy steps to shore up growth, from Europe to Japan to China.”

Williams said China’s reduced growth forecasts have been wrongly treated as a harbinger of economic doom. He considers those adjustments to be in line with China’s long-run potential as a maturing economy.

Williams reiterated Fed plans, as of now, for “gradual and thoughtful” interest rate increases that are communicated effectively.

“One of the lessons from the taper tantrum is that it’s not the policy that causes disruption, it’s the uncertainty. The actual tapering did not cause a negative market reaction. Our plans for both rate hikes and the balance sheet are steady and consistently communicated. It’s frankly the most telegraphed monetary policy of our lifetimes,” he said.

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